How Much Life Insurance do you need?

“If I’ve got 10 kids who all want to go to Harvard, then I’ll need more than a family of 4 whose tradition is to go serve our country for 4 years out of high school. This great country of ours needs both of these types of people, most of us fall in the middle somewhere.”

We will all have a different answer here. I’m sure if you ask my wife, she would say I need far more than I feel like I would need. I can’t blame her though, she should get a lot of money for putting up with me on a regular basis.

I’ve heard in the media and from browsing online that we need anywhere from 10-20 times our annual salary. This is an outdated rule today based on the current economy and interest rates and averages that do not necessarily apply to everyone’s case. It also doesn’t take into account our existing savings and family needs. If I’ve got 10 kids who all want to go to Harvard, then I’ll need more than a family of 4 whose tradition is to go serve our country for 4 years out of high school. This great country of ours needs both of these types of people, most of us fall in the middle somewhere.

There’s a DIME formula which takes into consideration your:
– Debt/final expenses – debts (not including mortgage) + Funeral expenses
– Income – decide how many years your family would need support, and multiply your income by that number.
– Mortgage – amount left on mortgage
– Education – estimate the cost of sending your kids to college
This is certainly a more detailed way to find your number, but it still doesn’t take into account your savings or any other life policies you may already have.

I agree with what nerdwallet.com suggests. Simply calculate your obligations: Add your annual salary (times # of years of income you’re replacing) + mortgage balance + your other debts + your future needs for college and funeral costs. From that, subtract liquid assets: Savings + existing college funds + current life insurance plans. There you go, it’s quite simple.

Remember these tips. Most of our incomes grow as we get older, so make sure you take that into consideration. Also, kiddos need some time to make money out of college, so error on the high side when deciding term length. Same goes for coverage, error on the higher side rather than the lower. A little cushion doesn’t hurt. Lastly, talk to your spouse!! See what they think. They may have a different number than you do and you don’t want them cursing your name at your funeral.